“There is a reason why we are seeing so many retirement
system reform proposals coming down the pike from Washington and the states,
and from so many other places and points of interest,” Bob Collie, chief research strategist
for Russell Investments, Americas Institutional, tells PLANSPONSOR. “And
the reason is that there is still some real weakness in the U.S. retirement
system that is proving to be really challenging to overcome—especially when it
comes to the basic question of access to a tax-qualified plan option.”

Collie says retirement industry practitioners should not fool
themselves into thinking the current retirement planning paradigm is built on unmovable
foundations, or that it can’t move quickly enough to cause painful disruption.
Even practices that seem set in stone can change fairly quickly, he notes,
citing as a prime example the ongoing fiduciary redefinition debate that has caused no small amount of disruption
already, even though the new fiduciary rule from the Labor Department is still in
proposal form.

Beyond the basic fact that there is an estimated
$27 trillion in the U.S. tax-advantaged retirement savings system at a time
when federal budget pressures cause perennial partisan gridlock, defined
contribution (DC) plans are quickly becoming the bedrock of U.S. workers’ plans
for retirement. This is despite the fact that the Employee Retirement Income Security
Act (ERISA), which sets many of the federal rules that currently govern both defined
benefit (DB) and DC retirement plans, was penned long before the first 401(k) plan
was created.

“My message to people in the industry is, given this set of facts, don’t expect lawmakers to leave all that money alone, and don’t expect
today’s practices to continue forever,” Collie adds.

Collie suggests lawmakers, regulators and retirement industry
practitioners “have made major changes to the way we treat people inside plans.”
But he warns this movement—sparked by the Pension Protection Act’s expansion of automatic enrollment and the use of target-date funds and other asset-allocation solutions as a
default for participants—hasn’t really helped the huge swaths of people who don’t
have good access to investments and are either saving everything in cash, or
worse, are saving nothing at all.

Collie notes that total retirement plan coverage figures vary widely
according to the source, but one reliable outlet is the Employee Benefits Research
Institute (EBRI). Data from EBRI suggests that the act of making a tax-advantaged savings plan
available is the single most important driver of retirement success in the United States. According to EBRI’s numbers, when excluding workers younger than 21 and
older than 65, as well as part-time workers, the proportion of full-time
private sector workers without access to a retirement plan at work is in the
range of 39%. This figure seems dauntingly high, Collie admits, but it’s not even close to the worst projections one can find. Many researchers believe the uncovered number is closer to 50%.

“Digging deeper, we see that one of the defining
characteristics of this uncovered population is that they work for small
companies and they tend to have lower salaries,” Collie explains. “The question
that is so quickly becoming top of mind in Washington and in many state
legislatures is, what can we do for this unsupported group of people? They’re going
to need to retire someday just like everyone else, and right now we don’t have
a good answer about how to make that possible.”

Collie says a small set of proposals has developed at the federal
level, which seems to get reintroduced every year but has so far failed to get
enough traction to move ahead. These proposals vary in how they would impact
the tax treatment of retirement plans, and many seem untenable due to their
wholly partisan approach to tax reform, but Collie feels plan advisers and sponsors
should prepare themselves for eventual movement. (See “Industry
Groups Alarmed About Tax Reform.”)

One common element in the proposals, including the tax
reform proposal
from President Obama, is the creation of more automatic and mandatory
access to tax-advantaged retirement accounts for segments of workers currently
lacking coverage.

“They have floated some innovative ideas, but unfortunately this
type of a major sweeping change is unlikely to get passed at the federal level
under the current makeup of the government, so it’s also a very strong trend
that state legislatures are picking up these proposals,” Collie notes. “One
thing to highlight is that, wherever the conversation is happening, it’s all
about coverage and how to expand it.”

Indeed, numerous states are moving
to fill the private sector retirement plan void, up to 18 or 20 at Collie’s
last count. He says many of the programs are taking a similar shape—establishing
voluntary, low-risk, automatic-enrollment retirement savings platforms for
workers who currently lack access to retirement savings plans through their
jobs.

“The Secure
Choice Program in Illinois is a good example for the industry to follow, because
they included pretty thoughtful provisions, I think, which represent a lot of the
auto-IRA movement across the country,” Collie says. “The notable
thing about Illinois’ approach is just how they managed to get from the basic
idea of doing this to actually implementing the law much more quickly than other
states, such as California and Maryland and others.”

As these efforts unfold, Collie says states typically set up
working groups and committees with long deadlines “to examine all this complicated
stuff and report back,” either to the legislature or the governor, with some
set of recommendations.

“In Illinois, they have been much more aggressive in their
approach,” he explains. “Importantly, Illinois is taking the same approach as
the other states—creating more automated access to individual savings accounts
and automated deferrals. The features aren’t very unique, so it’s going to be a
really good archetype for us to watch. We’ll watch how this one goes and it
will give us a clue as to whether it’s like to work out in other states.”

Collie says the Illinois program is important for another reason
beyond being among the most aggressive and earliest implementations.

“The Illinois lawmakers showed this process is really all
about aligning stakeholders and getting buy-in from a lot of different
constituencies with interests that are related, but also distinct in some
critical ways,” Collie explains. “I was not on the ground in
Illinois and it’s just one of the examples we’re following, but they
demonstrated that you need the labor unions to be supportive, for example, and you
need the state’s business advocacy groups to be supportive of auto-IRAs as well. It’s no
small task to align these interests, and to create the system in a way that you
get service provider buy-in as well. All of these elements are critical.”